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The Basics

Discount property is any property that is for sale below market value. Here's an example:

A home can potentialy sell for $100,000 but is being sold for $75,000. In this case it is being sold for a $25,000 discount and has $25,000 equity.

Owners may sell their property for below it's market value for a number of reasons. Here are a few:

  • The property is in need of repair.
  • Imminent foreclosure.
  • Sudden relocation.
  • The owner inherited a property that has become burdensome.
  • Personal emergency that requires immediate funds.

In some cases when an owner considers the cost of selling a home through traditional means he/she may decide to sell at a discount since it may actually result in more money to them. Discounted properties are sought-after by investors and cash buyers who are often willing to pay all closing costs and close in days rather than months. The result is a much cheaper transaction for the seller and less time on the market. These factors can lead to an owner receiving about the same or even more money by selling below market. Here's an example:

Consider a property that has a market value of $200,000. Let's look at two scenarios; the first where the home is sold using an agent for $200,000 and the second where the home is sold directly to a buyer or investor for cash for $180,000.

Typical Sale Discount Sale
Sale Price $200,000 $180,000
Commission -$12,000 -$0
Closing costs + -$5,000 -$0 (paid by buyer)
Interest & Taxes * -$3,650 -$608
Net Cash $179,350 $179,392

+ Closing costs include title fees, title insurance, seller concessions etc.
* Interest and taxes were calculated assuming annual property taxes of $5,000 and monthly mortgage interest of $800. The conventional sale is assumed to take 90 days to list and sell with the discount sale taking 14 days.

Discounted homes may make sense for the following reasons:

  1. They can provide a blank slate
    • A heavily discounted property sometimes has enough equity that the purchaser can afford to do a complete remodel and not go over the property's market value. Not going over the market value is especially important when considering that banks will typically only lend up to a certain amount of a property's value for a mortgage. The financial ability to perform a complete remodel allows the new owner to have just the right paint, kitchen, bathrooms, flooring and fixtures that he/she wants to create the perfect home. A homeowner can have their dream home without breaking the bank.
  2. To make a profit
    • Discounted properties can be purchased, repaired/remodeled and sold for a profit; a practice commonly known as flipping.
    • These homes are sometimes leased to generate steady rental income.
  3. To build net worth
    • A property that is obtained for below market value can immediately increase the purchaser's net worth.
  4. As an investment
    • In some cases a property may be purchased and leased even though no profit is generated from the rent income ie: the monthly rent is just enough to cover the mortgage or other financing used for purchase. Over time the value of the property can increase while the debt against it decreases steadily with each mortgage payment. The owner can then find himself/herself owning a valuable asset in the future. In this way, discount properties can be purchased and used as a way to invest for retirement or children's college tuition.

A Real Estate Investor purchases property (land or buildings) for the purpose of using it to make money.

A wholeseller typically sells their interest in a real estate contract. Here's an example of how that works:

  1. A wholeseller signs a contract agreeing to buy person A's house for $100,000
  2. The wholeseller finds person B who is willing to buy the house for $110,000
  3. Person B pays the wholeseller $10,000 to take over the contract with person A
  4. The wholeseller makes a quick $10,000, person A receives the $100,000 as agreed and person B pays a total of $110,000

In other cases a wholeseller actually purchases the property but sells it very soon after for a profit. This can take place in a matter of hours and can work as follows:

  1. A wholeseller signs a contract agreeing to buy person A's house for $100,000
  2. The wholeseller finds person B who is willing to buy the house for $110,000
  3. The wholeseller collects a deposit of $2,000 from person B
  4. The wholeseller purchases and pays for the property from person A at 10:00 A.M.
  5. The wholeseller sells the property to person B at 11:00 A.M. and collects the remaining $108,000
  6. The wholeseller makes a quick $10,000, person A receives the $100,000 as agreed and person B pays a total of $110,000

After Repair Value (ARV) is an estimate of what a property's market value would be after it is repaired or remodeled.

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